Morgan Stanley Reviews Exxon's Earnings

In a report published Friday, Morgan Stanley analysts maintained an Underweight rating on Exxon Mobil Corporation XOM. Exxon Mobil reported its 1Q15 EPS ahead of expectations largely due to a lower tax rate and improved upstream and downstream performances. The company's net debt grew, however, by nearly $3 billion during the quarter. "While 1Q15 results were better than expected and demonstrate the benefits of integration, we continue to prefer large cap E&P exposure in a recovery that we believe is unfolding. We believe XOM will participate yet unlikely lead in a commodity recovery we expect will unfold over the next 12 months and see upside potential and yield support," the analysts mentioned. Exxon Mobil has the potential to acquire other players in the segment in a down cycle. The company's integrated cash flows, balanced sheet support and yield supported valuation put it in a highly advantageous position. "With XOM at a premium to a number of Large cap E&Ps (on EV/EBITDAX), an equity transaction remains possible. Capacity is further bolstered by ability to borrow debt at record low levels," the analysts stated. Exxon Mobil had recently raised $7Bn of variable maturity notes at 1.305 percent-3.567percent, securing a cost of capital advantage to global E&Ps. "We believe offshore exposure or international assets with significant SG&A cost rationalizations are a better strategic fit for XOM," the report said.